Under the new regulation, traders have to disclose short positions to Italian authorities equivalent to 0.2 percent or more of a company's share capital. Then, they have to notify every change in that position equivalent to 0.1 percent of the capital.

The rule will be effective starting Monday and will last until September. It was prompted by the sell-off of Italian bonds and bank shares in Friday's session.

After the pushing Greece, Ireland, and Portugal to the verge of collapse, the market is smelling blood in Italy, which is by far its biggest European target to date.

Italy is the third largest economy in the euro zone after Germany and France. Despite being a highly industrialized and developed economy, Italy is hampered by corruption, excessive state bureaucracy, and (perhaps most importantly) a monstrous public debt level.

Italy is clearly in the 'too-big-to-fail' league. If the market pushes it to the brink of default, it would be catastrophic for Italy, the European banking system, and Germany (which may be eventually forced to bail it out).

Financial Times on Sunday reported that US hedge funds are taking big shorts on Italian government bonds, citing investors of the hedge funds.